Glossary
Adjustable Rate Mortgage (ARM) - A mortgage in which the interest rate changes periodically during the life of the loan according to the movement of a pre-selected index.
Appraisal - An opinion or estimate by a qualified person of the property value.
Amortization Schedule - A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance. Amortization period is the time period of time over which a calculated mortgage payment will fully repay a set loan amount at a specific interest rate.
Annual Percentage Rate (APR) - The total yearly cost of a mortgage stated as a percentage of the loan amount. It is higher than the interest rate because it includes interest, fees, points, and mortgage insurance. The APR gives you a tool to compare various kinds of mortgages with different lending institutions.
Balloon Mortgage - A mortgage that has a fixed rate, level monthly payments that amortizes over a certain term, with the unpaid balance due as a lump sum on the balloon maturity date.
Cap - A provision of an ARM limiting how much the interest rate or mortgage payments may increase.
Cash Out - A loan transaction in which the borrower receives funds at the time of closing.
Closing - The occasion where a sale is finalized; the buyer signs the mortgage and notes, closing costs are paid, and the funds are disbursed to complete the sale and loan transaction.
Closed-end loan - A loan that does not allow for additional extensions of credit as the principal balance is repaid and whose term has a stated maturity date.
Closing Costs - Expenses incurred in the closing of a mortgage loan whether it be a purchase or a refinance. The costs usually include items such as: origination fees, discount fees, appraisal, credit report , and prepaid items such as taxes and insurance.
Commitment Letter - A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer.
Conventional Mortgage - Any mortgage that is not insured or guaranteed by the federal government.
Convertible ARM - An adjustable rate mortgage that can be converted to a fixed rate mortgage under special conditions.
Credit Report - A report of an individual's credit history prepared by a Credit Bureau and used by a lender in the loan approval process.
Debt-to-Income Ratio - A calculation of total monthly obligations to total monthly income used to determine the maximum financing terms which should be extended.
Deed - A document by which the ownership of real property is transferred from one party to another.
Default - The failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.
Delinquency - A loan in which a payment is overdue but not yet in default.
Discount Points - A one-time charge assessed at closing to decrease the interest rate. One point is equal to 1/4 percent of the loan amount.
Down Payment - The portion of the purchase price which the buyer pays in cash and does not finance with the mortgage; this is the difference between the sales price and the amount of the mortgage.
Equity - The difference between the market value of a property and the homeowner's outstanding liens.
Escrow Account - An account which has been created specifically to hold a portion of an applicant's mortgage payment for the subsequent payment of real estate taxes, hazard insurance, pmi insurance, and special assessments.
Federal Home Loan Mortgage Corporation - FHLMC (Freddie Mac) - Freddie Mac is a shareholder-owned corporation that creates a continuous flow of funds to mortgage lenders by purchasing mortgages from lenders and packaging them into securities that are sold to investors.
First Mortgage - A real estate mortgage that has first claim over any subsequently recorded mortgages.
Fixed Interest Rate - An interest rate that does not change during the loan term.
Fixed-rate Mortgage - A mortgage in which the interest rate and payments remain the same for the life of the loan.
Foreclosure - The process by which a mortgaged property may be sold when a mortgage is in default.
Flood Hazard Area - An area in a community which has been designated by the Director of the Federal Emergency Management Agency (FEMA) as having a high degree of risk for becoming damaged by flooding at any given time.
Good Faith Estimate - A disclosure at application time which provides a breakdown of the estimated closing costs.
Gross Monthly Income - The total amount you earn each month, prior to any deductions.
Hazard Insurance - An insurance policy that covers any physical damage to your property, such as fire, wind, hail, and other natural disasters.
Home Equity Line of Credit (HELOC) - A real estate loan that provides a revolving line of credit based on the equity available in your home.
Index - A regularly published rate, that is used with the margin to establish interest rates charged on Adjustable Rate Mortgages.
Investment Property - Property owned that is used for supplementing income and not intended for owner occupancy.
Joint Tenancy - A manner in which real property may be titled. It means that two or more persons hold the same interest in the property and upon the death of one of the joint tenants, the interest of the deceased person passes to the survivor(s) and the entire parcel of land is then owned solely by the surviving joint tenant(s).
Late Charge - A charge when a scheduled payment is received later than its due date and any allowed grace period.
Loan to Value Ratio - The amount of the proposed loan versus the appraised value of the subject property, expressed as a percentage.
Lock-in Period - The number of days during which a lender guarantees a borrower a specific interest rate and terms on a mortgage.
Margin - A fixed percentage that is added to the index at each adjustment period to determine the interest rate for an ARM.
Mortgage - A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Insurance - See Private Mortgage Insurance.
Mortgage Note - A written promise to pay a sum of money at a stated interest rate during a specified term. The note contains a description of the conditions under which the loan is to be repaid and when it is due.
Non-Conforming Loan - A loan that does not conform to the traditional Freddie Mac or Fannie Mae requirements.
Origination Fee - The amount charged for services performed by the company handling the initial application and processing of the loan.
Points - See Discount Points
Prepayment Penalty - A fee charged to a borrower who pays off a loan before the maturity date.
Primary Residence - A residence which the borrower intends to occupy as the principal residence.
Prequalification - This indicates the loan amount you may qualify for before the proposed new home is found. This prequalification is issued using non-verified information. Final rate and commitment issued only after final underwriting has been completed.
Prepaid Items - Items that must be paid for at the time of closing; most common are: interim interest, taxes, first year premium for required insurance, and fees applicable to certain loan products.
Private Mortgage Insurance - Insurance provided by non-government insurers that protects lenders against loss if a borrower defaults.
Real Estate Settlement Procedures Act (RESPA) - A federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow account balances.
Refinance - The borrower replaces a debt from proceeds of a new loan using the same property for security for the purpose of getting a better interest rate, loan term, or to get cash out.
Second Mortgage - A mortgage on the same property, that is in a second position (or subordinate to) the original first mortgage.
Servicing Retained - A loan sale in which the original lender's servicing department continues to service the loan after the sale to a secondary institution, such as Freddie Mac or Fannie Mae.
Settlement Costs - See Closing Costs
Sweat Equity - The contribution by the applicant to the construction or improvement of a property in the form of labor or services rather than cash.
Title - A legal document establishing the right of ownership.
Truth-In-Lending (TIL) - A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other changes.
